Banks' earnings up, but profit margins tighter

Apr. 11, 2013
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In this Wednesday, Dec. 19, 2012 photo, a man walks past a Wells Fargo location in Philadelphia. U.S. banks are closing the year with the strongest profits since 2006 and fewer failures than at any time since the financial crisis struck in 2008. They're helping support an economy slowed by high unemployment, flat pay, sluggish manufacturing and anxious consumers. (AP Photo/Matt Rourke) ORG XMIT: NYBZ302 / Matt Rourke AP

by Tim Mullaney, USA TODAY; @timmullaney

by Tim Mullaney, USA TODAY; @timmullaney

Big banks have been picking up steam with the economy, but the March hiccup in job growth has investors holding their breath about whether the good times are still on.

First-quarter earnings news from Wells Fargo and JPMorgan Chase on Friday will kick off reports by the 18 banks at the core of a financial system still recovering from the 2008 crisis. JPMorgan is expected to make $1.38 a share, up from $1.31 last year. Wells Fargo probably will say it made 88 cents a share compared with 75 cents in the first quarter of 2012, S&P Capital IQ says.

As much as the profits, analysts and economists will watch banks' loan volumes for clues into whether credit is loose enough to nurture the recovery.

As the nation's largest mortgage lender by far, Wells' results will highlight whether home buyers are stepping up and finding the loans they need. And JPMorgan, as a top investment bank, will serve as an early indicator of how bad the early-2013 weakness in investment-banking businesses like merger advisory services actually is.

"You should hear good news,'' said Raymond James Financial analyst Anthony Polini.

He expects the biggest banks to post loan growth of close to 10% compared with last year, getting some growth from a better economy while continuing to steal market share from smaller institutions.

In general, banks are doing much better, said Dick Bove, an analyst at Rafferty Capital. They have more capital, loan losses are way down, and loan volume may grow at a double-digit pace from last year, Bove said.

The issue is that interest rates are so low that banks are having trouble keeping up the profit margin they need. The difference between loan rates and the rates banks pay for deposits - about 3.4 percentage points in late 2012, according to the Federal Reserve - is down from 4 points in 2002, after the 2001 recession, and from almost 5 points in 1994, after the early-1990s downturn.

Also, banks' numbers may show less year-over-year improvement than results for the fourth quarter because of how the economy seemingly slowed in March, Baird Equity Research analyst David George said.

"There's a feeling something is lacking in the recovery, and no one can put their finger on it,'' SNL Financial analyst Nancy Bush said.

As banks go, so go prospects for getting credit, said John Lonski, chief economist at Moody's Capital Markets.

U.S. commercial and industrial lending dropped 13% even in the 15 months after the recession ended in 2009, hampering the recovery, Lonski said. Since credit began loosening in late 2010, monthly job gains have jumped to an average of 188,600 private-sector jobs from virtually no growth between July 2009 and October 2010, he said.